Exhibit 13
Thermo Optek Corporation
Consolidated Financial Statements
1998
Thermo Optek Corporation 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues (Notes 7 and 11) $447,301 $512,464 $ 446,583
-------- -------- ---------
Costs and Operating Expenses:
Cost of revenues (Note 9) 240,613 276,998 251,450
Selling, general, and administrative expenses (Note 7) 111,909 126,750 119,516
Research and development expenses 24,963 30,861 26,831
Restructuring costs (Note 9) 8,026 - -
-------- ------- ---------
385,511 434,609 397,797
-------- ------- ---------
Operating Income 61,790 77,855 48,786
Interest Income (includes $357 and $564 from related party in 4,490 4,448 5,536
1998 and 1997; Note 7)
Interest Expense (includes $1,346 and $1,896 to related parties (7,254) (10,197) (7,630)
-------- ------- ---------
in 1998 and 1997; Note 8)
Income Before Provision for Income Taxes and Extraordinary Item 59,026 72,106 46,692
Provision for Income Taxes (Note 5) 25,443 30,796 19,429
-------- ------- ---------
Income Before Extraordinary Item 33,583 41,310 27,263
Extraordinary Item, Net of Provision for Income Taxes of $165 280 - -
-------- ------- ---------
(Note 8)
Net Income $ 33,863 $41,310 $ 27,263
======== ======= =========
Earnings per Share (Note 12)
Basic $ .66 $ .82 $ .56
======== ======= =========
Diluted $ .63 $ .77 $ .55
======== ======= =========
Weighted Average Shares (Note 12)
Basic 51,639 50,669 48,564
======== ======= =========
Diluted 57,420 57,261 55,130
======== ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Thermo Optek Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents $ 59,427 $ 71,245
Accounts receivable, less allowances of $4,960 and $5,709 105,759 99,342
Inventories 63,697 70,095
Prepaid expenses 6,831 7,643
Prepaid income taxes (Note 5) 10,777 9,634
Due from parent company and affiliated companies (Note 2) 704 5,342
-------- --------
247,195 263,301
-------- --------
Property, Plant, and Equipment, at Cost, Net 62,894 62,741
-------- --------
Patents and Other Assets 6,427 7,707
-------- --------
Due From Thermo Vision Corporation (Note 7) 3,947 3,947
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 2 and 5) 241,205 242,840
-------- --------
$561,668 $580,536
======== ========
3
Thermo Optek Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of long-term obligations (1997 $ 22,602 $ 67,267
includes $40,000 due to Thermo Electron; Note 8)
Accounts payable 22,685 22,798
Accrued payroll and employee benefits 12,824 12,825
Accrued income taxes 20,958 18,906
Accrued installation and warranty expenses 15,171 19,266
Deferred revenue 20,017 19,486
Other accrued expenses (Note 2) 35,147 35,161
-------- --------
149,404 195,709
-------- --------
Deferred Income Taxes (Note 5) 10,546 12,456
-------- --------
Other Deferred Items 2,906 2,678
-------- --------
Long-term Obligations (Note 8) 71,761 81,400
-------- --------
Commitments and Contingency (Note 6)
Shareholders' Investment (Notes 3 and 4):
Common stock, $.01 par value, 100,000,000 shares authorized; 51,790,115 518 516
and 51,645,161 pro forma shares issued
Capital in excess of par value 265,904 263,301
Retained earnings 69,640 35,777
Treasury stock at cost, 479,209 and 594 shares (4,459) (10)
Accumulated other comprehensive items (4,552) (11,291)
-------- --------
327,051 288,293
-------- --------
$561,668 $580,536
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Thermo Optek Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------ ---------- ----------- ----------
Operating Activities
Net income $33,863 $ 41,310 $27,263
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 8,710 10,494 9,320
Amortization 6,571 6,925 5,702
Provision for losses on accounts receivable 519 629 1,078
Extraordinary item (Note 8) (445) - -
Deferred income tax expense (benefit) (1,132) 2,662 (354)
Other noncash items 3,779 1,669 1,814
Changes in current accounts, excluding the effects of acquisitions and
distribution of Thermo Vision to shareholders:
Accounts receivable 1,035 (5,583) (2,940)
Inventories 7,284 5,334 1,500
Other current assets 1,140 442 463
Accounts payable (3,082) (6,260) (9,187)
Due to parent company and affiliated companies (2,243) 17,309 (8,506)
Other current liabilities (1,469) (2,245) (218)
Other 233 (66) 1,543
------- -------- -------
Net cash provided by operating activities 54,763 72,620 27,478
------- -------- -------
Investing Activities
Acquisitions, net of cash acquired (Note 2) (7,907) (45,589) (67,583)
Payment to parent company for acquisitions of VG Systems in - (45,545) (36,558)
1997 and Mattson and Unicam in 1996 (Note 2)
Refund from parent company for acquisitions (Note 2) 6,737 - -
Purchases of property, plant, and equipment (8,225) (8,619) (8,806)
Proceeds from sale of property, plant, and equipment 1,194 1,705 -
Other 479 980 (359)
------- -------- -------
Net cash used in investing activities (7,722) (97,068) (113,306)
------- -------- --------
Financing Activities
Net proceeds from issuance of Company common stock (Note 4) 169 79 42,937
Proceeds from issuance (repayment) of notes payable to Thermo (40,000) 43,800 -
Electron (Notes 2 and 8)
Purchases of Company common stock and subordinated convertible (10,570) - -
debentures
Decrease in short-term obligations, net (8,617) (14,746) (2,970)
Repayment of long-term obligations (1,655) (418) (4,221)
Capital contribution from affiliated company 366 1,042 -
------- -------- -------
Net cash provided by (used in) financing activities $(60,307) $ 29,757 $35,746
-------- -------- -------
5
Thermo Optek Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------ ---------- ----------- ----------
Exchange Rate Effect on Cash $ 1,448 $ (735) $ (137)
------- -------- -------
Increase (Decrease) in Cash and Cash Equivalents (11,818) 4,574 (50,219)
Cash and Cash Equivalents at Beginning of Year 71,245 66,671 116,890
------- -------- -------
Cash and Cash Equivalents at End of Year $59,427 $ 71,245 $66,671
======= ======== =======
Cash Paid For
Interest $ 7,336 $ 9,491 $ 7,172
Income taxes $23,661 $ 14,617 $11,331
Noncash Activities
Conversions of convertible debentures $ 1,780 $ 16,294 $ -
Distribution of Thermo Vision to shareholders (Note 1) $ - $ 24,614 $ -
Fair value of assets of acquired companies $15,006 $ 56,797 $254,418
Cash paid for acquired companies (8,537) (46,457) (72,065)
Stock issuable to parent company for acquired companies - (12) (23,814)
Due to parent company for acquired companies - - (45,545)
------- -------- --------
Liabilities assumed of acquired companies $ 6,469 $ 10,328 $112,994
======= ======== ========
Adjustment of purchase price due from parent company for $ - $ 6,737 $ -
======= ======== ========
companies acquired in 1996 (Note 2)
The accompanying notes are an integral part of these consolidated financial
statements.
6
Thermo Optek Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Comprehensive Income
Net Income $ 33,863 $41,310 $ 27,263
-------- ------- --------
Other Comprehensive Items:
Foreign currency translation adjustment 6,739 (10,165) (1,060)
-------- ------- --------
$ 40,602 $31,145 $ 26,203
======== ======= ========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 516 $ 505 $ 450
Conversions of convertible debentures (Note 8) 2 11 -
Issuance of Company common stock (Note 4) - - 35
Issuance of Company common stock for acquired company (Note 2) - - 20
-------- -------- --------
Balance at end of year 518 516 505
-------- -------- --------
Capital in Excess of Par Value:
Balance at beginning of year 263,301 245,917 215,342
Conversions of convertible debentures (Note 8) 1,752 16,037 -
Issuance of Company common stock (Note 4) 181 89 42,902
Issuance of Company common stock for acquired companies (Note 2) - 12 23,794
Tax benefit related to employees' and directors' stock plans 304 204 437
Capital contribution from affiliated companies 366 1,042 -
Payment to parent company for acquired businesses (Note 2) - - (36,558)
-------- -------- --------
Balance at end of year 265,904 263,301 245,917
-------- -------- --------
Retained Earnings:
Balance at beginning of year 35,777 20,843 5,262
Net income 33,863 41,310 27,263
Distribution of Thermo Vision to shareholders (Note 1) - (24,614) -
Deemed distribution to parent company for acquired companies - (1,762) (11,682)
(Note 2) -------- -------- --------
Balance at end of year 69,640 35,777 20,843
-------- -------- --------
Treasury Stock:
Balance at beginning of year (10) - -
Purchases of Company common stock (4,437) - -
Activity under employees' and directors' stock plans (12) (10) -
-------- -------- --------
Balance at end of year (4,459) (10) -
-------- -------- --------
Accumulated Other Comprehensive Items:
Balance at beginning of year (11,291) (1,126) (66)
Other comprehensive items 6,739 (10,165) (1,060)
-------- -------- ---------
Balance at end of year (4,552) (11,291) (1,126)
-------- -------- ---------
$327,051 $288,293 $ 266,139
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Thermo Optek Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Optek Corporation (the Company) is a worldwide leader in analytical
instruments that use a range of optical spectroscopy and energy-based
techniques, and systems for materials analysis, characterization, and
preparation. These instruments are used in virtually every industry for
elemental and molecular analysis of a wide variety of solids, liquids, and
gases, as well as in testing and fabricating advanced materials. The Company
operates in two reportable segments: Spectroscopy and Materials Science.
Relationship with Thermo Instrument Systems Inc. and Thermo Electron Corporation
The Company was incorporated in August 1995 as a wholly owned subsidiary of
Thermo Instrument Systems Inc. After the formation of the Company, Thermo
Instrument transferred to the Company all of the assets, liabilities, and
businesses of Nicolet Instrument Corporation and Thermo Jarrell Ash Corporation
(TJA) in exchange for 45,000,000 shares of the Company's common stock. At
January 2, 1999, Thermo Instrument owned 47,567,689 shares of the Company's
common stock, which include 2,075,342 pro forma shares relating to the
acquisition of Gebrueder Haake GmbH (Haake), representing 93% of such stock
outstanding. Thermo Instrument is an 85%-owned subsidiary of Thermo Electron
Corporation. At January 2, 1999, Thermo Electron owned 1,028,860 shares of the
Company's common stock, representing 2% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
and 1996 each include 52 weeks; fiscal 1997 included 53 weeks.
Distribution of Thermo Vision Corporation to Shareholders
The Company had a wholly owned subsidiary, Thermo Vision Corporation,
which supplied a diverse array of photonics products - light-based technologies
for scientific and industrial applications including optical components, sensors
and imaging systems, and optically based instruments and lasers. On December 15,
1997, the Company distributed 100% of Thermo Vision's outstanding capital stock
in the form of a dividend to the Company's shareholders. As a result of the
distribution, Thermo Vision is a publicly traded, majority owned subsidiary of
Thermo Instrument. The results of operations of Thermo Vision after December 15,
1997, have been excluded from the accompanying financial statements.
Revenue Recognition
The Company recognizes product revenues upon shipment of its products and
recognizes service contract revenues ratably over the term of the contract. The
Company provides a reserve for its estimate of warranty and installation costs
at the time of shipment. Deferred revenue in the accompanying balance sheet
consists primarily of unearned revenue on service contracts. Substantially all
of the deferred revenue in the accompanying 1998 balance sheet will be
recognized within one year.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 3). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
8
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company and Thermo Instrument have a tax allocation agreement under
which both the Company and Thermo Instrument are included in Thermo Electron's
consolidated federal and certain state income tax returns. The agreement
provides that in years in which the Company has taxable income, it will pay to
Thermo Electron amounts comparable to the taxes the Company would have paid if
it had filed separate tax returns. If Thermo Instrument's and Thermo Electron's
combined equity ownership of the Company were to drop below 80%, the Company
would be required to file its own federal income tax return.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the conversion of convertible obligations
and the elimination of the related interest expense, and the exercise of stock
options, as well as their related income tax effects.
Cash and Cash Equivalents
At year-end 1998 and 1997, $8,216,000 and $28,130,000, respectively, of
the Company's cash equivalents were invested in a repurchase agreement with
Thermo Electron. Under this agreement, the Company in effect lends excess cash
to Thermo Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement are readily convertible into cash by the Company and have
an original maturity of three months or less. The repurchase agreement earns a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter.
The Company, along with other subsidiaries of Thermo Electron,
participates in a notional pool arrangement with Barclays Bank, which includes a
$71 million credit facility. The Company has access to $17.7 million under this
credit facility. Only U.K.-based subsidiaries of Thermo Electron participate in
this arrangement. Under this arrangement, Barclays notionally combines the
positive and negative cash balances held by the participants to calculate the
net interest yield/expense for the group. The benefit derived from this
arrangement is then allocated based on balances attributable to the respective
participants. Thermo Electron guarantees all of the obligations of each
participant in this arrangement. At year-end 1998 and 1997, the Company had cash
balances under this arrangement of $7,812,000 and $1,421,000, respectively.
At year-end 1998 and 1997, the Company's cash equivalents also included
investments in commercial paper and short-term certificates of deposit held by
the Company's foreign operations, which have an original maturity of three
months or less. Cash equivalents are carried at cost, which approximates market
value.
9
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Raw Material and Supplies $30,657 $35,101
Work in Process 12,360 12,369
Finished Goods 20,680 22,625
------- -------
$63,697 $70,095
======= =======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings, 10 to 40 years; machinery
and equipment, 3 to 10 years; and leasehold improvements, the shorter of the
term of the lease or the life of the asset. Property, plant, and equipment
consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Land $ 8,926 $ 8,525
Buildings 42,028 40,394
Machinery, Equipment, and Leasehold Improvements 49,492 43,792
------- -------
100,446 92,711
Less: Accumulated Depreciation and Amortization 37,552 29,970
------- -------
$62,894 $62,741
======= =======
Patents and Other Assets
Patents and other assets in the accompanying balance sheet includes the
costs of acquired patents that are amortized using the straight-line method over
their estimated useful lives, which range from 12 to 13 years. These assets were
$5,205,000 and $6,335,000, net of accumulated amortization of $8,220,000 and
$7,091,000, at year-end 1998 and 1997, respectively. Patents and other assets in
the accompanying balance sheet also includes deferred debt costs of $650,000 and
$1,199,000, net of accumulated amortization of $1,624,000 and $1,101,000, at
year-end 1998 and 1997, respectively. Deferred debt costs are amortized through
the maturity of the related debt in 2000.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method primarily over 40 years. Accumulated
amortization was $26,797,000 and $21,992,000 at year-end 1998 and 1997,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired companies in assessing the recoverability of this asset. If impairment
has occurred, any excess of carrying value over fair value is recorded as a
loss.
10
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Environmental Liabilities
The Company accrues for costs associated with the remediation of
environmental pollution when it is probable that a liability has been incurred
and the Company's proportionate share of the amount can be reasonably estimated.
Any recorded liabilities have not been discounted.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of income and are not material for the three years presented.
Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"Other comprehensive items," which represents foreign currency translation
adjustments, reported as a component of shareholders' investment in the
accompanying balance sheet. At year-end 1998 and 1997, the balance of
accumulated other comprehensive items represents the Company's cumulative
translation adjustment.
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies. These
contracts principally hedge transactions denominated in U.S. dollars, British
pounds sterling, Japanese yen, French francs, and Swiss francs. The purpose of
the Company's foreign currency hedging activities is to protect the Company's
local currency cash flows related to these commitments from fluctuations in
foreign exchange rates. Gains and losses arising from forward foreign exchange
contracts are recognized as offsets to gains and losses resulting from the
transactions being hedged. The Company does not enter into speculative foreign
currency agreements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
The historical information for 1997 and 1996 has been restated to reflect
the August 1998 acquisition of Haake. This acquisition has been accounted for at
historical cost in a manner similar to a pooling of interests (Note 2). In
addition, certain amounts in 1997 and 1996 have been reclassified to conform to
the presentation in the 1998 financial statements.
11
2. Acquisitions
Acquisitions Effective in 1998
In August 1998, the Company purchased Scintag Inc. for $4,000,000 in cash
and the assumption of approximately $892,000 of debt. Scintag, located in
Cupertino, California, is a leading supplier of powder X-ray diffractometers
used primarily in research laboratories for applications in metallurgy,
materials science, ceramics, electronics, mineralogy, and chemistry. In addition
to Scintag, during 1998, the Company acquired four businesses for an aggregate
purchase price of $4,537,000 in cash and assumption of $1,126,000 of debt. These
acquisitions have been accounted for using the purchase method of accounting.
Acquisitions Effective in 1997
In March 1997, Thermo Instrument acquired Life Sciences International PLC
(LSI), a London Stock Exchange-listed company. In July 1997, the Company agreed
to acquire Spectronic Instruments, Inc., a former LSI subsidiary, from Thermo
Instrument. Spectronic is a Rochester, New York-based supplier of
ultraviolet/visible (UV/Vis) spectroscopy instruments and accessories,
fluorescence instruments, and diffraction gratings for industrial and
educational markets worldwide. The purchase price for Spectronic consisted of:
(i) $20,150,000 in cash, (ii) 1,000 shares of the Company's common stock valued
at $12,000, and (iii) the assumption of $19,700,000 of debt payable to Thermo
Instrument. The purchase price represents the sum of the net tangible book value
of Spectronic as of June 28, 1997, plus a percentage of Thermo Instrument's
total cost in excess of net assets acquired associated with its acquisition of
Life Sciences, based on the 1996 revenues of Spectronic relative to Life
Sciences' 1996 consolidated revenues. The cash portion of the purchase price was
paid in September 1997 together with interest calculated at the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter, from June 28, 1997. The 1,000 shares of common stock to be issued
to Thermo Instrument will be issued when they are listed for trading on the
American Stock Exchange.
Because the Company and Spectronic were deemed for accounting purposes to
be under control of their common majority owner, Thermo Instrument, the
transaction has been accounted for in a manner similar to a pooling of
interests. Accordingly, the accompanying financial statements include the
results of Spectronic from March 12, 1997, the date the business was acquired by
Thermo Instrument, and the shares issuable to Thermo Instrument have been deemed
outstanding from that date. The purchase price included $1,762,000 for the
increase in net book value from the date Spectronic was acquired by Thermo
Instrument to June 28, 1997. This amount was recorded as a deemed distribution
from retained earnings, reflecting payment by the Company to Thermo Instrument
for the earnings of Spectronic from the date of the acquisition by Thermo
Instrument until the date of transfer to the Company.
During 1997, the Company acquired four additional companies, for an
aggregate $7,566,000 in cash, which were accounted for using the purchase method
of accounting. Thermo Vision acquired two of the companies for $7,400,000. To
fund one of those acquisitions, Thermo Vision borrowed $3,800,000 from Thermo
Electron pursuant to a promissory note. The promissory note is payable by Thermo
Vision, and is not an obligation of the Company. The Company also acquired a
former Singapore sales and service organization of the Scientific Instruments
Division of Fisons plc from Thermo Instrument for the assumption of $585,000 of
debt.
To partially fund acquisitions in 1997, the Company borrowed $40,000,000
from Thermo Electron pursuant to a promissory note, which was repaid in August
1998 (Note 8).
Acquisitions Effective in 1996
On March 29, 1996, Thermo Instrument acquired a substantial portion of the
businesses constituting the Scientific Instruments Division of Fisons (Fisons),
a wholly owned subsidiary of Rhone-Poulenc Rorer Inc. (RPR). In August 1998, the
Company agreed to acquire Haake, a business formerly part of Fisons, from Thermo
Instrument for 2,075,342 shares of the Company's common stock, valued at
$23,814,000 at the time of the transaction, and the assumption of $10,354,000 of
debt. The 2,075,342 shares of common stock to be issued to Thermo Instrument
will be issued when they are listed for trading on the American Stock Exchange.
In July 1997, the Company agreed to acquire VG Systems Limited, a business
formerly part of Fisons, from Thermo Instrument for $45,545,000 in cash. In
November 1996, the Company acquired two businesses that were formerly a part of
Fisons, A.R.L. Applied Research
12
2. Acquisitions (continued)
Laboratories S.A. (ARL) and VG Elemental Limited, from Thermo Instrument for an
aggregate $55,196,000 in cash and the assumption of $16,593,000 of debt. The
purchase price for these acquisitions was determined based on the net tangible
book value of Haake, VG Systems, VG Elemental, and ARL at March 29, 1996, and a
pro rata allocation of Thermo Instrument's total cost in excess of net assets
acquired associated with its acquisition of the Fisons businesses. Haake is a
supplier of viscometry and rheometry systems used by a wide variety of
manufacturers to measure the physical properties of liquid substances. Haake
also manufactures mixers, extruders, post-extrusion equipment, circulators,
baths, cryostats, water recirculators, and PVT analyzers. VG Systems is a
manufacturer of instrumentation and equipment for materials- and surface-science
analysis and fabrication. VG Elemental is a manufacturer of inductively coupled
plasma (ICP)/mass spectroscopy instruments. ARL is a manufacturer of X-ray
fluorescence instruments and Arc/Spark spectrometers.
In December 1997, Thermo Instrument and RPR negotiated a post-closing
adjustment under the terms of the purchase agreement for the Fisons acquisition
pertaining to the determination of the net assets of the Fisons businesses at
the date of acquisition. This negotiation resulted in a refund to Thermo
Instrument that included interest from the date of acquisition. The Company
recorded a receivable from Thermo Instrument totaling $7,257,000 on January 3,
1998, which represented the Company's share of the refund received by Thermo
Instrument. Payment of this amount was received in 1998. The Company recorded
$5,884,000 of the refund as a reduction of cost in excess of net assets of
acquired companies. Of the remainder, $853,000 represents payment for
uncollected accounts receivable acquired by the Company that were guaranteed by
RPR, and $520,000 represents interest income on the refund from the date of
acquisition. The receivable from Thermo Instrument is included in due from
parent company and affiliated companies in the accompanying 1997 balance sheet.
Because the Company, Haake, VG Systems, VG Elemental, and ARL were deemed
for accounting purposes to be under control of their common majority owner,
Thermo Instrument, the transactions have been accounted for in a manner similar
to a pooling of interests. Accordingly, the accompanying financial statements
include the results of Haake, VG Systems, VG Elemental, and ARL from March 29,
1996, the date these businesses were acquired by Thermo Instrument. The purchase
prices of Haake and VG Systems included $4,780,000 and $6,902,000, respectively,
for the increase in net book value from the date the businesses were acquired by
Thermo Instrument to July 4, 1998, and June 28, 1997, respectively. The total of
these two amounts, $11,682,000, was recorded as a deemed distribution from
retained earnings, reflecting payment by the Company to Thermo Instrument for
the earnings of Haake and VG Systems from the date of the acquisition by Thermo
Instrument until the dates of transfer to the Company.
During 1996, Thermo Vision acquired two additional companies, for an
aggregate $16,869,000 in cash and the assumption of $731,000 of debt, which were
accounted for using the purchase method of accounting.
General
Excluding the Thermo Vision acquisitions, the aggregate cost of
acquisitions in 1998, 1997, and 1996 exceeded the estimated fair value of the
acquired net assets by $132,264,000, which is being amortized primarily over 40
years. Allocation of the purchase price for these acquisitions was based on
estimates of the fair value of the net assets acquired. The aggregate cost of
Thermo Vision's acquisitions during this same period exceeded the estimated fair
value of the acquired net assets by $11,998,000, which had been amortized over
40 years through the date on which the Company distributed its interest in
Thermo Vision.
In connection with its acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The restructuring
activities included reductions in staffing levels, abandonment of excess
facilities, and other costs associated with exiting certain activities of the
acquired businesses. The reserves established were recorded as costs of the
respective acquisitions in accordance with Emerging Issues Task Force
Pronouncement (EITF) 95-3. The Company finalizes its restructuring plans for
each business no later than one year from the date of the acquisition
13
2. Acquisitions (continued)
in accordance with the requirements of EITF 95-3. A summary of the changes in
accrued acquisition expenses, which are included in other accrued expenses in
the accompanying balance sheet, is:
Abandonment
of Excess
(In thousands) Severance Facilities Total
- -------------------------------------------------------------- -------------- ------------- --------------
Balance at December 30, 1995 $ 4,781 $ 6,683 $ 11,464
Reserves established 14,880 4,952 19,832
Usage (11,619) (4,181) (15,800)
Decrease due to finalization of restructuring plan, (1,667) (3,526) (5,193)
recorded as a decrease to cost in excess of net assets
of acquired companies -------- ------- --------
Balance at December 28, 1996 6,375 3,928 10,303
Reserves established 1,513 640 2,153
Usage (5,449) (1,897) (7,346)
Decrease due to finalization of restructuring plan, (1,451) (372) (1,823)
recorded as a decrease to cost in excess of net assets
of acquired companies
Distribution of Thermo Vision to shareholders (271) (172) (443)
-------- ------- --------
Balance at January 3, 1998 717 2,127 2,844
Reserves established 717 46 763
Usage (579) (1,061) (1,640)
Decrease due to finalization of restructuring plan, (335) (497) (832)
recorded as a decrease to cost in excess of net assets
of acquired companies -------- ------- --------
Balance at January 2, 1999 $ 520 $ 615 $ 1,135
======== ======= ========
Based on unaudited data, the following table presents selected financial
information for the Company and the businesses acquired, on a pro forma basis,
assuming the Company, Haake, VG Systems, VG Elemental, ARL, and Spectronic had
been combined since the beginning of 1996. The effect of the acquisitions not
included in the pro forma data was not material to the Company's results of
operations.
(In thousands except per share amounts) 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues $517,110 $ 515,768
Net Income 39,432 19,161
Earnings per Share:
Basic .78 .39
Diluted .74 .40
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisitions of Haake, VG
Systems, VG Elemental, ARL, and Spectronic been made at the beginning of 1996.
14
3. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others, that permit the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under the plans are determined by
the Board Committee. As of year-end 1998, only nonqualified stock options have
been awarded under these plans. Generally, options granted are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a one- to ten-year period depending on the term of
the option, which generally ranges from five to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's common stock on the date of grant. To date, all options have
been granted at fair market value. The Company also has a directors' stock
option plan that provides for the grant of stock options to outside directors
pursuant to a formula approved by the Company's shareholders. Options granted
under this plan have the same general terms as options granted under the
stock-based compensation plans described above, except that the restrictions and
repurchase rights generally lapse ratably over a four-year period and the option
term is five years. In addition to the Company's stock-based compensation plans,
certain officers and key employees may also participate in the stock-based
compensation plans of Thermo Electron and Thermo Instrument.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 231,000 shares at a weighted average exercise price of $15.26 per share
elected to participate in this exchange and, as a result, received options to
purchase 115,000 shares of Company common stock at $9.61 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
15
3. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is:
1998 1997 1996
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 2,557 $10.84 2,397 $10.53 - $ -
Granted 932 10.37 332 12.95 2,511 10.53
Exercised (17) 10.46 (7) 10.47 - -
Forfeited (189) 10.73 (165) 10.61 (114) 10.47
Canceled due to exchange (231) 15.26 - - - -
----- ----- -----
Options Outstanding, End of Year 3,052 $10.37 2,557 $10.84 2,397 $10.53
===== ====== ===== ====== ===== ======
Options Exercisable 3,052 $10.37 2,557 $10.84 2,397 $10.53
===== ====== ===== ====== ===== ======
Options Available for Grant 798 610 528
===== ===== =====
A summary of the status of the Company's stock options at January 2, 1999,
is:
Options Outstanding and Exercisable
------------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ----------------------------------------------- ------------------- ------------------- --------------------
$ 8.00 - $ 10.22 701 5.0 years $ 8.27
10.23 - 12.44 2,151 8.2 years 10.52
14.67 - 16.88 200 8.4 years 16.09
------
$ 8.00 - $ 16.88 3,052 7.5 years $10.37
=====
Option prices have been adjusted to reflect the reduction in the Company's
net assets resulting from the distribution of Thermo Vision to the Company's
shareholders pursuant to the guidance of EITF 90-9.
Employee Stock Purchase Program
Effective November 1, 1997, substantially all of the Company's full-time
U.S. employees are eligible to participate in an employee stock purchase program
sponsored by the Company and Thermo Electron, under which employees can purchase
shares of the Company's and Thermo Electron's common stock. Prior to November 1,
1997, the program was sponsored by Thermo Instrument and Thermo Electron. Prior
to the 1998 program year, the applicable shares of common stock could be
purchased at the end of a 12-month period at 95% of the fair market value at the
beginning of the period, and the shares purchased were subject to a six-month
resale restriction. Effective November 1, 1998, the applicable shares of common
stock may be purchased at 85% of the lower of the fair market value at the
beginning or end of the period, and the shares purchased are subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
16
3. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
under the Company's stock-based compensation plans been determined based on the
fair value at the grant dates consistent with the method set forth under SFAS
No. 123, the effect on the Company's net income and earnings per share would
have been:
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Net Income:
As reported $33,863 $41,310 $27,263
Pro forma 32,050 40,288 26,388
Basic Earnings per Share:
As reported .66 .82 .56
Pro forma .62 .80 .54
Diluted Earnings per Share:
As reported .63 .77 .55
Pro forma .60 .75 .53
Pro forma compensation expense for options granted is reflected over the
vesting period; therefore, future pro forma compensation expense may be greater
as additional options are granted.
The weighted average fair value per share of options granted was $3.21,
$4.73, and $4.98 in 1998, 1997, and 1996, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 28% 28% 26%
Risk-free Interest Rate 4.6% 5.8% 6.8%
Expected Life of Options 4.0 years 5.2 years 7.7 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
Substantially all of the Company's full-time U.S. employees are eligible
to participate in a 401(k) savings plan sponsored by Thermo Electron.
Contributions to the 401(k) savings plan are made by both the employee and the
Company. Company contributions to the 401(k) plan are based upon the level of
employee contributions. For this plan, the Company contributed and charged to
expense $1,037,000, $1,805,000, and $1,302,000 in 1998, 1997, and 1996,
respectively.
17
3. Employee Benefit Plans (continued)
Other Retirement Plans
Certain of the Company's subsidiaries offer other defined contribution
plans in lieu of participation in the Thermo Electron 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $2,819,000,
$2,472,000, and $1,640,000 in 1998, 1997, and 1996, respectively.
4. Common Stock
In June and July 1996, the Company sold 3,450,000 shares of its common
stock in an initial public offering at $13.50 per share for net proceeds of
$42,937,000.
At January 2, 1999, the Company had reserved 9,152,983 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
for issuance upon possible conversion of the Company's subordinated convertible
debentures.
5. Income Taxes
The components of income before provision for income taxes and
extraordinary item are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Domestic $31,656 $ 40,366 $29,221
Foreign 27,370 31,740 17,471
------- -------- -------
$59,026 $ 72,106 $46,692
======= ======== =======
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Currently Payable:
Federal $12,640 $ 13,902 $10,267
State 2,333 2,641 2,115
Foreign 11,602 11,591 7,401
------- -------- -------
26,575 28,134 19,783
------- -------- -------
Net Deferred (Prepaid):
Federal (920) 924 (211)
State (115) 196 (45)
Foreign (97) 1,542 (98)
------- -------- -------
(1,132) 2,662 (354)
------- -------- -------
$25,443 $ 30,796 $19,429
======= ======== =======
The provision for income taxes that is currently payable does not reflect
$3,476,000, $6,954,000, and $1,397,000 of tax benefits used to reduce cost in
excess of net assets of acquired companies in 1998, 1997, and 1996,
respectively. In addition, the Company receives a tax deduction upon exercise of
nonqualified stock options by employees for the difference between the exercise
price and the market price of the underlying common stock on the date of
exercise. The provision for income taxes that is currently payable does not
reflect $304,000, $204,000, and $437,000 of such benefits that have been
allocated to capital in excess of par value in 1998, 1997, and 1996,
respectively.
18
5. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes and extraordinary
item due to:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Provision for Income Taxes at Statutory Rate $20,659 $ 25,237 $16,342
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 1,442 1,844 1,346
Amortization of cost in excess of net assets of acquired companies 1,153 1,295 1,013
Net foreign losses not benefited and foreign tax rate and tax law 1,926 2,024 1,186
differential
Tax benefit of foreign sales corporation (748) (704) (606)
Other, net 1,011 1,100 148
------- -------- -------
$25,443 $ 30,796 $19,429
======= ======== =======
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------- --------- --------
Prepaid Income Taxes:
Foreign tax loss carryforwards $ 22,110 $20,791
Reserves and accruals 3,135 4,317
Inventory basis difference 5,153 4,113
Accrued compensation 1,065 920
Other, net 1,424 284
-------- -------
32,887 30,425
Less: Valuation allowance 22,110 20,791
-------- -------
$ 10,777 $ 9,634
======== =======
Deferred Income Taxes:
Depreciation $ 6,112 $ 7,547
Intangible assets 1,576 2,980
Other, net 2,858 1,929
-------- -------
$ 10,546 $12,456
======== =======
The valuation allowance relates to the uncertainty surrounding the use of
foreign tax loss carryforwards, the realization of which is limited to the
future income of certain subsidiaries. As of January 2, 1999, Unicam had tax
loss carryforwards in the U.K. of $29,115,000 that are subject to review and
adjustment by the U.K. Inland Revenue Service as a result of the acquisition of
the analytical instruments division of Analytical Technology, Inc. by Thermo
Instrument. These and additional foreign tax loss carryforwards of $31,764,000
can be used only to offset taxable income generated in certain foreign
countries. The loss carryforwards generally do not expire. The increase in the
valuation allowance results from the increase in foreign net operating loss
carryforwards, primarily due to a change in foreign tax rates, utilization and
expiration, and currency fluctuations. Any tax benefit resulting from use of the
loss carryforwards has been or will be recorded as a reduction of cost in excess
of net assets of acquired companies.
19
5. Income Taxes (continued)
A provision has not been made for U.S. or additional foreign taxes on
$56,029,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.
6. Commitments and Contingency
Commitments
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $10,726,000, $10,998,000, and
$7,552,000 in 1998, 1997, and 1996, respectively. Future minimum payments due
under third party noncancelable operating leases at January 2, 1999, are
$8,251,000 in 1999, $6,093,000 in 2000, $4,646,000 in 2001, $4,087,000 in 2002,
$3,792,000 in 2003, and $8,645,000 in 2004 and thereafter. Total future minimum
lease payments are $35,514,000.
Contingency
Prior to Nicolet's acquisition by the Company, the Wisconsin Department of
Natural Resources (DNR) notified Nicolet that the DNR had begun a remedial
investigation to determine the extent of releases of hazardous substances from
the Refuse Hideaway Landfill located in Middleton, Wisconsin (the Landfill), and
that Nicolet was a potential responsible party (PRP) with regard to the
Landfill. Approximately 50 other parties were also notified of their PRP status.
The Environmental Protection Agency (EPA) subsequently added the Landfill to its
National Priorities List under the Comprehensive Environmental Response
Compensation and Liability Act of 1980 (CERCLA). In February 1995, the EPA and
the DNR recommended that various remediation efforts be made at the Landfill at
an estimated cost of approximately $5.2 million, and the Company expects that
such agencies will also seek to recover their oversight costs and expenses
related to the site. Under CERCLA, responsible parties can include current and
previous owners of a site, generators of hazardous substances disposed of at a
site, and transporters of hazardous substances to a site. Each responsible party
can be jointly and severally liable, without regard to fault or negligence, for
all costs associated with the remediation of the site. Although the Company
believes that the quantity of materials generated by Nicolet and transported to
the Landfill is relatively small in comparison to that of other named PRPs,
there can be no assurance as to the exact amount, if any, for which Nicolet will
be held responsible by the EPA and the DNR for costs associated with remediation
of the Landfill.
In connection with the organization of the Company, Thermo Instrument
agreed to indemnify the Company for any cash damages resulting from this matter.
Notwithstanding this indemnification, the Company would be required to report
any such damages as an expense in its results of operations, with any
indemnification payment it receives from Thermo Instrument being treated as a
contribution to shareholders' investment. In the opinion of management,
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
7. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996, the Company paid an amount equal to
1.0% of the Company's revenues. For these services, the Company was charged
$3,578,000, $5,125,000, and $4,466,000 in 1998, 1997, and
20
7. Related-party Transactions (continued)
1996, respectively. The fee is reviewed and adjusted annually by mutual
agreement of the parties. The corporate services agreement is renewed annually
but can be terminated upon 30 days' prior notice by the Company or upon the
Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo
Electron Corporate Charter defines the relationship among Thermo Electron and
its majority-owned subsidiaries). Management believes that the service fee
charged by Thermo Electron is reasonable and that such fees are representative
of the expenses the Company would have incurred on a stand-alone basis. For
additional items such as employee benefit plans, insurance coverage, and other
identifiable costs, Thermo Electron charges the Company based upon costs
attributable to the Company.
Operating Leases
The Company leases office and manufacturing space to ThermoSpectra
Corporation and Nicolet Biomedical Inc., subsidiaries of Thermo Instrument and
Thermo Electron, respectively, pursuant to an arrangement whereby the Company
charges ThermoSpectra and Nicolet Biomedical their allocated share of the
occupancy expenses of the Company's Wisconsin facility, based on the space
ThermoSpectra and Nicolet Biomedical use. The Company recorded operating lease
income of $901,000, $906,000, and $913,000 in 1998, 1997, and 1996,
respectively, which is deducted from selling, general, and administrative
expenses in the accompanying statement of income. These leases are effective
until December 31, 2001.
Due from Thermo Vision Corporation
Thermo Vision borrowed $3,947,000 from the Company pursuant to promissory
notes due February 2000. These notes bear interest at the 90-day Commercial
Paper Composite Rate plus 25 basis points, set at the beginning of each quarter.
The interest rate for the notes was 5.36% and 5.76% at year-end 1998 and 1997,
respectively.
Other Related-party Transactions
The Company purchases and sells products in the ordinary course of
business with other companies affiliated with Thermo Instrument. Sales of
products to such affiliated companies totaled $9,425,000, $12,931,000, and
$29,504,000 in 1998, 1997, and 1996, respectively. Purchases of products from
such affiliated companies totaled $3,807,000, $8,007,000, and $13,286,000 in
1998, 1997, and 1996, respectively.
The higher related-party sales in 1996 results from the Company's
acquisitions of ARL and VG Elemental. Throughout most of 1996, the marketing and
ultimate resale of products manufactured by these businesses were performed by
business units that were formerly part of the Fisons businesses, which were
acquired by Thermo Instrument. In late 1996, the Company began selling these
products through its existing distribution channels and, therefore, the amount
of related-party sales declined subsequently.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement and a notional
pool arrangement with Thermo Electron as discussed in Note 1.
Short-term Obligations
See Note 8 for short-term obligations of the Company held by Thermo
Electron.
8. Short- and Long-term Obligations
Short-term Obligations
To partially fund the July 1997 acquisitions of VG Systems and Spectronic
from Thermo Instrument, the Company borrowed $40,000,000 from Thermo Electron
pursuant to a promissory note and bearing interest at the 90-day Commercial
Paper Composite Rate plus 25 basis points, set at the beginning of each quarter.
The interest rate for this note was 5.76% at year-end 1997. This note was
included in notes payable and current maturities of long-term obligations in the
accompanying 1997 balance sheet and was paid in August 1998.
21
8. Short- and Long-term Obligations (continued)
Notes payable and current maturities of long-term obligations in the
accompanying balance sheet also includes $19,228,000 and $26,772,000 at year-end
1998 and 1997, respectively, of short-term bank borrowings and amounts borrowed
under lines of credit by the Company's foreign subsidiaries.
In addition, the Company's Netherlands-based subsidiaries have an
agreement with a wholly owned subsidiary of Thermo Electron under which the
subsidiaries can borrow funds that bear interest at a rate based on Netherlands
market rates, set at the beginning of each month. At year-end 1998, the Company
had borrowings under this agreement of $2,575,000, which are included in notes
payable and current maturities of long-term obligations in the accompanying
balance sheet.
The weighted average interest rate for the Company's short-term borrowings
was 4.4% and 5.0% at year-end 1998 and 1997, respectively. Unused lines of
credit were $53,622,000 at year-end 1998, including $1,680,000 under the
arrangement with an affiliated company described above.
Long-term Obligations
(In thousands except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
5% Subordinated Convertible Debentures, Due 2000, Convertible at $13.95 per $71,505 $ 79,956
share
Other 1,055 1,939
------- --------
72,560 81,895
Less: Current Maturities of Long-term Obligations 799 495
------- --------
$71,761 $ 81,400
======= ========
The debentures are guaranteed on a subordinated basis by Thermo Electron.
Thermo Instrument has agreed to reimburse Thermo Electron in the event Thermo
Electron is required to make a payment under the guarantee. The conversion price
of the debentures was reduced to $13.95 per share, effective December 15, 1997,
as a result of the distribution of Thermo Vision to the Company's shareholders.
During 1998 and 1997, $1,780,000 and $16,294,000 principal amount,
respectively, of the 5% subordinated convertible debentures were converted into
127,646 and 1,111,316 shares, respectively, of the Company's common stock.
During 1998, the Company repurchased $6,671,000 principal amount of its
convertible debentures for $6,133,000 in cash, resulting in an extraordinary
gain of $280,000, net of taxes of $165,000.
The annual requirements of long-term obligations as of January 2, 1999,
are $799,000 in 1999 and $71,761,000 in 2000. Total future requirements of
long-term obligations are $72,560,000.
9. Restructuring and Related Costs
During 1998, the Company recorded restructuring charges and related costs
of $10,070,000. The restructuring costs of $8,026,000, which were accounted for
in accordance with EITF 94-3, consisted of $5,493,000 for severance and benefits
for 160 employees, primarily in manufacturing positions; $1,367,000 for lease
payments on abandoned facilities; $234,000 for a write-down of assets, primarily
leasehold improvements to be abandoned; $370,000 for the loss on the sale of a
division (VG Broadcast, see below); and $562,000 for miscellaneous items,
including costs for terminating certain contracts and agency relationships. In
addition, the Company recorded an inventory write-down of $2,044,000 related to
discontinuing certain product lines and increased excess and obsolescence
reserves associated with lower product demand. The inventory write-down is
included in cost of revenues in the accompanying statement of income.
22
9. Restructuring and Related Costs (continued)
In 1998, the Company sold its VG Broadcast division, a United
Kingdom-based business providing data and text transmission equipment to the
television industry. In 1997, VG Broadcast had revenues and operating income of
$3,228,000 and $605,000, respectively. In 1998, through the date of its sale in
July 1998, it had revenues of $1,397,000 and operating income before
restructuring costs of $355,000.
In connection with these actions, the Company expects to incur an
estimated $1,100,000 of additional expenses in aggregate in 1999 for costs not
permitted as restructuring charges in 1998, pursuant to the requirements of EITF
94-3. These costs primarily include costs to move inventory and certain employee
relocation and related costs. The Company plans to complete the implementation
of its restructuring plan during 1999.
In 1998, the Company terminated 123 employees and made $1,846,000 of
severance payments, $271,000 of abandoned lease payments, and $362,000 of
miscellaneous payments. The remaining reserve for severance, abandoned-facility
and related exit costs of $4,943,000, as adjusted for the impact of currency
translation, is included in other accrued expenses in the accompanying balance
sheet as of January 2, 1999. The Company plans to complete its restructuring
plan during 1999.
10. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, due from parent company and affiliated
companies, notes payable and current maturities of long-term obligations,
accounts payable, long-term obligations, and forward foreign exchange contracts.
The carrying amounts of these financial instruments, with the exception of
long-term obligations and forward foreign exchange contracts, approximate fair
value due to their short-term nature.
The fair value of the Company's 5% subordinated convertible debentures was
$68,201,000 and $89,759,000 at year-end 1998 and 1997, respectively. The
carrying amount of the Company's other long-term obligations approximates fair
value at year-end 1998 and 1997. The fair value of long-term obligations was
determined based on quoted market prices and on borrowing rates available to the
Company at the respective year-ends.
The notional amounts of forward foreign exchange contracts outstanding
totaled $23,635,000 and $25,718,000 at year-end 1998 and 1997, respectively. The
fair value of such contracts is the estimated amount that the Company would pay
or receive upon termination of the contract, taking into account the change in
foreign exchange rates. The fair value of the Company's forward foreign exchange
contracts was a payable of $829,000 and a receivable of $922,000 at year-end
1998 and 1997, respectively.
11. Business Segments and Geographical Data
The Company organizes and manages its business by individual functional
operating entity. The Company operates in two reportable segments: Spectroscopy
and Materials Science. In classifying operational entities into a particular
segment, the Company aggregates businesses with similar economic
characteristics, products and services, production processes, customers, and
methods of distribution.
The Spectroscopy segment develops and manufactures analytical
instrumentation for molecular and elemental analysis based upon energy and light
measurements. The Materials Science segment develops and manufactures
instruments for surface analysis, characterization, and preparation and
physical-properties analysis.
Through December 15, 1997, the Company's results include those of Thermo
Vision (Note 1). Thermo Vision designs, manufactures, and markets a diverse
array of photonics products - light-based technologies that are embedded as
"enabling technologies" in a wide range of applications. Balances classified as
"Other" in the segment data substantially represent amounts pertaining to Thermo
Vision.
23
11. Business Segments and Geographical Data (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Business Segment Information
Revenues:
Spectroscopy (a) $ 347,067 $365,317 $ 322,761
Materials Science (b) 100,677 112,916 103,398
Other (c) - 35,008 30,515
Intersegment sales elimination (d) (443) (777) (10,091)
--------- -------- ---------
$ 447,301 $512,464 $ 446,583
========= ======== =========
Income Before Provision for Income Taxes and Extraordinary Item
(e):
Spectroscopy $ 51,863 $ 61,242 $ 44,275
Materials Science 16,548 19,689 8,503
Other (335) 3,367 2,116
Corporate (f) (6,286) (6,443) (6,108)
--------- -------- ---------
Total operating income 61,790 77,855 48,786
Interest expense, net (2,764) (5,749) (2,094)
--------- -------- ---------
$ 59,026 $ 72,106 $ 46,692
========= ======== =========
Total Assets:
Spectroscopy $ 422,350 $419,552 $ 392,259
Materials Science 115,977 113,737 149,032
Other (362) - 25,574
Corporate (g) 23,703 47,247 49,451
--------- -------- ---------
$ 561,668 $580,536 $ 616,316
========= ======== =========
Depreciation and Amortization:
Spectroscopy $ 11,587 $ 11,306 $ 9,807
Materials Science 3,623 4,332 4,097
Other 71 1,781 1,118
--------- -------- ---------
$ 15,281 $ 17,419 $ 15,022
========= ======== =========
Capital Expenditures:
Spectroscopy $ 5,238 $ 4,534 $ 5,682
Materials Science 2,952 2,303 1,327
Other 35 1,782 1,797
--------- -------- ---------
$ 8,225 $ 8,619 $ 8,806
========= ======== =========
24
11. Business Segments and Geographical Data (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Geographical Information
Revenues (h):
United States $233,022 $281,324 $ 216,806
England 115,777 126,860 116,782
Germany 57,249 60,240 64,808
Other Europe 95,133 94,832 74,731
Other 39,656 39,150 38,484
Transfers among geographical areas (i) (93,536) (89,942) (65,028)
-------- ------- ---------
$447,301 $512,464 $ 446,583
======== ======== =========
Long-lived Assets (j):
United States $ 34,748 $35,807 $ 37,089
England 8,091 8,074 10,333
Germany 7,326 6,995 9,620
Switzerland 9,335 8,454 9,481
Other 3,615 3,579 4,092
-------- ------- ---------
$ 63,115 $62,909 $ 70,615
======== ======= =========
Export Revenues Included in United States Revenues Above (k) $ 72,445 $86,559 $ 84,280
======== ======= =========
(a) Includes intersegment sales of $5,000, $241,000, and $4,959,000 in 1998,
1997, and 1996, respectively.
(b) Includes intersegment sales of $438,000, $536,000, and $3,381,000 in 1998,
1997, and 1996, respectively.
(c) Includes intersegment sales of $1,751,000 in 1996.
(d) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(e) Includes restructuring costs in 1998 of $6,314,000 in the Spectroscopy
segment and $1,712,000 in the Materials Science segment (Note 9).
(f) Primarily general and administrative expenses. (g) Primarily cash and cash
equivalents.
(h) Revenues are attributed to countries based on selling location.
(i) Transfers among geographical areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(j) Includes property, plant, and equipment, net, and other long-term tangible
assets.
(k) In general, export revenues are denominated in U.S. dollars.
25
12. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Basic
Net Income $33,863 $ 41,310 $27,263
------- -------- -------
Weighted Average Shares 49,564 48,594 46,905
Shares Issuable in Connection With the Acquisition of Haake (Note 2) 2,075 2,075 1,659
------- -------- -------
Pro Forma Weighted Average Shares 51,639 50,669 48,564
------- -------- -------
Basic Earnings per Share $ .66 $ .82 $ .56
======= ======== =======
Diluted
Net Income $33,863 $ 41,310 $27,263
Effect of convertible debentures 2,314 2,818 2,839
------- -------- -------
Income Available to Common Shareholders, as Adjusted $36,177 $ 44,128 $30,102
------- -------- -------
Pro Forma Weighted Average Shares 51,639 50,669 48,564
Effect of:
Convertible debentures 5,531 6,345 6,481
Stock options 250 247 85
------- -------- -------
Pro Forma Weighted Average Shares, as Adjusted 57,420 57,261 55,130
------- -------- -------
Diluted Earnings per Share $ .63 $ .77 $ .55
======= ======== =======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of January 2, 1999, there were 2,469,902 of such
options outstanding, with exercise prices ranging from $9.61 to $16.88 per
share.
An extraordinary gain recorded by the Company increased basic earnings per
share by $.01 in 1998 (Note 8).
26
13. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 (a) First Second Third Fourth
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
Revenues $113,799 $107,829 $107,507 $118,166
Gross Profit 52,840 52,087 47,379 54,382
Income Before Extraordinary Item 9,810 10,332 2,313 11,128
Net Income 9,810 10,332 2,526 11,195
Earnings per Share:
Basic .19 .20 .05 .22
Diluted .18 .19 .05 .21
1997 First (b) Second Third Fourth (c)
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
Revenues $117,367 $127,976 $127,871 $139,250
Gross Profit 54,417 58,891 59,100 63,058
Net Income 8,907 10,176 10,208 12,019
Earnings per Share:
Basic .18 .20 .20 .24
Diluted .17 .19 .19 .22
(a) Reflects extraordinary gain, net of taxes, of $0.2 million and $0.1 million
in the third and fourth quarter, respectively.
(b) Reflects the acquisition of Spectronic, effective March 1997. (c) Reflects
the distribution of Thermo Vision in December 1997.
27
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Optek Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Optek Corporation (a Delaware corporation and 93%-owned subsidiary of Thermo
Instrument Systems Inc.) and subsidiaries as of January 2, 1999, and January 3,
1998, and the related consolidated statements of income, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended January 2, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo Optek
Corporation and subsidiaries as of January 2, 1999, and January 3, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
28
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
Thermo Optek Corporation (the Company) is a worldwide leader in analytical
instruments that use a range of optical spectroscopy and energy-based
techniques, and systems for materials analysis, characterization, and
preparation. These instruments are used in virtually every industry for
elemental and molecular analysis of a wide variety of solids, liquids, and
gases, as well as in testing and fabricating advanced materials. The Company
operates in two reportable segments: Spectroscopy and Materials Science.
The Spectroscopy segment has three principal operating units: Madison,
Wisconsin-based Nicolet Instrument Corporation, a manufacturer and distributor
of Fourier transform infrared (FT-IR) and FT-Raman spectrometry products;
Franklin, Massachusetts-based Thermo Jarrell Ash Corporation, a manufacturer and
distributor of atomic absorption (AA) and atomic emission (AE) spectrometry
products; and Ecublens, Switzerland-based A.R.L. Applied Research Laboratories
S.A. (ARL), a manufacturer and distributor of wavelength-dispersive X-ray
fluorescence and AE instruments.
The Materials Science segment has two principal operating units, VG
Systems Limited, located in East Grinstead, England, and Gebrueder Haake GmbH
(Haake), located in Karlsruhe, Germany. VG Systems primarily includes VG
Semicon, a manufacturer and distributor of equipment for the production of
molecular-beam epitaxy products, and VG Scientific, a manufacturer and
distributor of instrumentation for surface and chemical analysis.
In December 1997, the Company distributed 100 percent of its Thermo Vision
Corporation subsidiary's capital stock in the form of a dividend to the
Company's shareholders. Thermo Vision supplies a diverse array of photonic
products - light-based technologies for scientific and industrial applications -
including optical components, sensors and imaging systems, and optically based
instruments and lasers. As a result of the distribution, Thermo Vision is a
publicly traded, majority-owned subsidiary of Thermo Instrument Systems Inc. The
consolidated financial statements of the Company include the results of Thermo
Vision through December 15, 1997. The results of Thermo Vision are not included
as a reportable segment and substantially represent the amounts classified as
"Other" in the segment data in Note 11 to Notes to Consolidated Financial
Statements.
The Company sells its products worldwide. Although the Company seeks to
charge its customers in the same currency as its operating costs, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations. Where appropriate, the Company uses forward
contracts to reduce its exposure to currency fluctuations.
In 1998, the Company's U.S. and foreign operations had revenues from
customers in Asia of approximately $72.7 million, or 16% of total revenues,
compared with Asia revenues of $100.0 million, or 20% of total revenues, in
1997. Certain countries in Asia continue to experience a severe economic crisis,
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales to Asia have been adversely affected by the
unstable economic conditions there. The unstable economic conditions in Asia
and, to a lesser extent, decreased order activity in the semiconductor industry,
have also resulted in a decrease in backlog. At January 2, 1999, the Company's
backlog was $85.4 million, compared
29
Overview (continued)
with $101.0 million at January 3, 1998. The Company does not believe that its
backlog is necessarily indicative of the intermediate or long-term trends in its
business. However, if the Asian economies were to continue to worsen and order
activity were to continue to decrease, the Company could experience a further
decrease in revenues, which could adversely impact the Company's business and
operating results.
Results of Operations
1998 Compared With 1997
Revenues decreased to $447.3 million in 1998 from $512.5 million in 1997.
The decrease resulted from several factors including the distribution of Thermo
Vision, which had revenues of $35.0 million in 1997; a $34.3 million decrease at
existing businesses primarily due to lower sales to Asia and, to a lesser
extent, the semiconductor industry; a $3.0 million decrease due to the
unfavorable effects of currency translation as a result of the strengthening in
the value of the U.S. dollar relative to foreign currencies in countries in
which the Company operates; a $3.8 million decrease due to a change in
distribution channels of affiliated parties; and a $1.8 million decrease due to
the sale of the Company's VG Broadcast division. These decreases were offset in
part by the inclusion of $12.7 million of revenues from acquisitions (Note 2).
Revenues at the Spectroscopy segment decreased to $347.1 million in 1998
from $365.3 million in 1997. The decrease was primarily the result of a decrease
in Asian and semiconductor sales, discussed in the Overview, a $3.0 million
decrease due to the unfavorable effects of currency translation, and a $0.9
million decrease due to a change in distribution channels of affiliated parties.
This decrease was offset in part by the inclusion of $10.7 million of revenues
from acquired businesses. Revenues at the Materials Science segment decreased to
$100.7 million in 1998 from $112.9 million in 1997. The decrease was primarily a
result of a decrease in Asian and semiconductor sales, a $2.9 million decrease
due to a change in distribution channels of affiliated parties, and a $1.8
million decrease as a result of the sale of the Company's VG Broadcast division.
This decrease was offset in part by $2.1 million of revenues from acquired
businesses.
The gross profit margin was relatively unchanged at 46.2% in 1998,
compared with 45.9% in 1997. The Company recorded inventory write-downs of $2.0
million in 1998 for discontinued products and excess inventories caused by
decreased product demand (Note 9). Excluding the impact of the write-downs, the
gross profit margin would have been 46.7% in 1998. The gross profit margin at
the Materials Science segment increased primarily due to margin improvements at
Haake and the elimination of lower-margin sales due to a change in distribution
channels of affiliated parties.
Selling, general, and administrative expenses as a percentage of revenues
was unchanged at 25% in 1998 and 1997.
Research and development expenses decreased to $25.0 million in 1998 from
$30.9 million in 1997, primarily as a result of the distribution of Thermo
Vision.
In addition to the inventory write-downs, the Company recorded
restructuring costs of $8.0 million in 1998 primarily related to severance costs
and the closure of facilities (Note 9). The Spectroscopy and Materials Science
segments incurred restructuring costs of $6.3 million and $1.7 million,
respectively. The Company plans to complete the implementation of its
restructuring plan in 1999. In connection with these actions, the Company
expects to incur an estimated $1.1 million of additional expenses in 1999.
Interest income was relatively unchanged at $4.5 million in 1998 and $4.4
million in 1997. Interest expense decreased to $7.3 million in 1998 from $10.2
million in 1997, primarily due to decreased borrowings under notes payable and
the inclusion in 1997 of interest paid to Thermo Instrument in connection with
certain acquisitions. In addition, interest expense declined due to the
conversion of a portion of the Company's subordinated convertible debentures
into common stock of the Company and the purchase by the Company of a portion of
its subordinated convertible debentures (Note 8).
30
1998 Compared With 1997 (continued)
The effective tax rate was 43% in 1998 and 1997. The Company's effective
tax rate for both periods exceeded the statutory federal income tax rate
primarily due to the effect of foreign tax rate and tax law differences, losses
not benefited in certain foreign countries, state income taxes, and
nondeductible amortization of cost in excess of net assets of acquired
companies, offset in part by the tax benefit associated with a foreign sales
corporation.
During 1998, the Company recorded an extraordinary gain, net of taxes, of
$0.3 million related to the early extinguishment of debt (Note 8).
The Company is involved in a proceeding relating to the cleanup of a
contaminated landfill (Note 6).
1997 Compared With 1996
Revenues increased to $512.5 million in 1997 from $446.6 million in 1996,
primarily due to the acquisitions of ARL, VG Elemental, VG Systems, and Haake,
effective March 29, 1996, and Spectronic, effective March 12, 1997 (Note 2).
Acquisitions added revenues of $90.7 million in 1997, including $8.6 million at
Thermo Vision. Revenues decreased $16.0 million due to the unfavorable effects
of currency translation as a result of the strengthening in value of the U.S.
dollar relative to currencies in foreign countries in which the Company operates
and decreased $10.0 million due to a change in distribution channels of
affiliated parties, described below. In addition, the distribution of Thermo
Vision to the Company's shareholders in December 1997 resulted in a reduction in
1997 revenues of $1.2 million, compared with 1996.
Revenues at the Spectroscopy segment increased to $365.3 million in 1997
from $322.8 million in 1996. The increase was primarily due to the inclusion of
$57.2 million of revenues from acquisitions, offset in part by a decrease of
$12.9 million as a result of the unfavorable effects of currency translation.
Increased demand at Nicolet was more than offset by the inclusion in 1996 of
several large non-recurring sales to the Chinese and Japanese governments, by a
decrease in demand for Thermo Jarrell Ash products in Japan, and the elimination
of certain unprofitable product lines at companies acquired in late 1995 and
1996. Revenues at the Materials Science segment increased to $112.9 million in
1997 from $103.4 million in 1996, primarily due to the inclusion of $24.9
million of revenues from acquisitions and, to a lesser extent, higher demand for
Haake products, offset in part by a decrease in revenues relating to the former
Fisons sales and service organization in Germany acquired by the Company with
the Haake acquisition. The lower revenues from the sales office resulted from
certain affiliated companies changing their distribution channels in Germany.
Revenues also decreased $3.1 million due to unfavorable effects of currency
translation.
The gross profit margin increased to 45.9% in 1997 from 43.7% in 1996. The
gross profit margin at the Spectrosopy segment increased due to margin
improvements at ARL and VG Systems and, to a lesser extent, the inclusion of
higher-margin revenues from Spectronic. The gross profit margin at the Material
Science segment increased primarily due to margin improvements at VG Systems and
Haake, and a decrease in lower-margin revenues at the former Fisons sales and
service organization in Germany, described above.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 25% in 1997 from 27% in 1996, primarily due to reduced selling and
administrative costs at certain divisions of the Spectroscopy segment. In
addition, selling, general, and administrative expenses as a percentage of
revenues at the Spectroscopy segment was favorably affected by the integration
of ARL and VG Elemental products into the Company's existing North American and
European distribution channels beginning in late 1996, without the addition of
significant incremental costs.
Research and development expenses increased to $30.9 million in 1997 from
$26.8 million in 1996, primarily as a result of the inclusion of expenses at
acquired businesses.
Interest income decreased to $4.4 million in 1997 from $5.5 million in
1996, primarily due to lower invested cash balances as a result of cash used to
fund acquisitions. Interest expense increased to $10.2 million in 1997 from $7.6
million in 1996, primarily due to interest paid to Thermo Instrument in
connection with the acquisitions of VG Systems and Spectronic (Note 2); interest
expense incurred on borrowings from Thermo Electron to finance the acquisitions
of VG Systems and Spectronic (Note 2); and the inclusion of interest on short-
and long-term borrowings at acquired businesses. These increases were offset in
part by a decrease in interest expense due to the conversion of a portion of the
Company's subordinated convertible debentures in the fourth quarter of 1997.
31
1997 Compared With 1996 (continued)
The effective tax rate was 43% in 1997, compared with 42% in 1996. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes, the nondeductible amortization of cost in
excess of net assets of acquired companies, foreign tax rate and tax law
differences, and the inability to provide a tax benefit on certain foreign
losses, offset in part by the tax benefit associated with a foreign sales
corporation.
Liquidity and Capital Resources
Consolidated working capital was $97.8 million at January 2, 1999,
compared with $67.6 million at January 3, 1998. Included in working capital are
cash and cash equivalents of $59.4 million at January 2, 1999, compared with
$71.2 million at January 3, 1998. During 1998, $54.8 million of cash was
provided by operating activities. The Company generated $7.3 million of cash
from a decrease in inventories resulting from management programs to decrease
inventories as a result of lower revenues. The Company used cash of $6.8 million
to decrease accounts payable and other current liabilities, including amounts
due to affiliated companies.
At January 2, 1999, $49.4 million of the Company's cash and cash
equivalents was held by its foreign subsidiaries. While this cash can be used
outside of the United States, including for acquisitions, repatriation of this
cash into the United States would be subject to foreign withholding taxes and
could also be subject to a U.S. tax.
The Company's investing activities used $7.7 million of cash in 1998. The
Company expended an aggregate of $7.9 million, net of cash acquired, for
acquisitions (Note 2). In addition, the Company expended $8.2 million for the
purchase of property, plant, and equipment. In 1999, the Company plans to make
capital expenditures of approximately $13.0 million. These uses of cash were
offset in part by a refund of $6.7 million received from Thermo Instrument
relating to the 1997 and 1996 purchases of certain former Fisons businesses.
The Company's financing activities used $60.3 million of cash in 1998.
In August 1998, the Company repaid $40.0 million to Thermo Electron that was
borrowed to partially finance the 1997 acquisitions of VG Systems and
Spectronic. During 1998, the Company repaid $10.3 million of short- and
long-term borrowings. In 1998, the Company's Board of Directors authorized the
repurchase, through September 25, 1999, of up to $20.0 million of Company
securities in the open market or in negotiated transactions. Through January 2,
1999, the Company had expended $10.6 million under this authorization for the
purchase of its common stock and subordinated convertible debentures. Such
purchases are funded from working capital. The Company's $71.5 million principal
amount 5% subordinated convertible debentures are due in October 2000. The
Company may need to borrow funds at the debt's maturity from Thermo Instrument
or the guarantor, Thermo Electron, although it has no agreements currently to do
so. The maturity of this debt could adversely affect the Company's liquidity in
the last half of 2000.
Although the Company expects to have positive cash flow from its existing
operations, the Company may require significant amounts of cash for any
acquisition of complementary businesses. The Company expects that it will
finance any such acquisitions through a combination of internal funds,
additional debt or equity financing from capital markets, or short-term
borrowings from Thermo Instrument or Thermo Electron Corporation, although it
has no agreement with these companies to ensure that funds will be available on
acceptable terms or at all.
Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices which could affect its future
results of operations and financial condition. The Company manages its exposure
to these risks through its regular operating and financing activities.
Additionally, the Company uses short-term forward contracts to manage certain
exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. The Company does not
engage in extensive foreign currency hedging activities; however, the purpose of
the Company's foreign currency hedging activities is to protect the Company's
local currency cash flows related to these commitments from fluctuations in
foreign exchange rates. The Company's forward foreign exchange contracts
principally hedge transactions denominated in U.S. dollars, British pounds
sterling, Japanese yen, French
32
Market Risk (continued)
francs, and Swiss francs. Gains and losses arising from forward contracts are
recognized as offsets to gains and losses resulting from the transactions being
hedged. The Company does not enter into speculative foreign currency agreements.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pound sterling,
Swiss francs, Dutch guilders, and French francs. The effect of a change in
foreign currency exchange rates on the Company's net investment in foreign
subsidiaries is reflected in the "Accumulated other comprehensive items"
component of shareholders' investment. A 10% depreciation in year-end 1998
functional currencies, relative to the U.S. dollar, would result in a $20.7
million reduction of shareholders' investment.
Forward foreign exchange contracts are sensitive to changes in foreign
currency exchange rates. The fair value of forward foreign exchange contracts is
the estimated amount that the Company would pay or receive upon termination of
the contract, taking into account the change in foreign currency exchange rates.
A 10% depreciation in year-end 1998 foreign currency exchange rates related to
the Company's contracts would result in an increase in the unrealized loss on
forward foreign exchange contracts of $1.6 million. Since the Company uses
forward foreign exchange contracts as hedges of firm purchase and sale
commitments, the unrealized gain or loss on forward foreign currency exchange
contracts resulting from changes in foreign currency exchange rates would be
offset by a corresponding change in the fair value of the hedged item.
Certain of the Company's cash and cash equivalents are denominated in
currencies other than the functional currency of the depositor and are sensitive
to changes in foreign currency exchange rates. A 10% depreciation in the related
foreign currency exchange rates would result in a negative impact of $0.9
million on the Company's net income.
Interest Rates
The Company's long-term obligations are sensitive to changes in interest
rates. Interest rate changes would result in a change in the fair value of these
long-term obligations due to the difference between the market interest rate and
the rate at the date of issuance of the long-term obligations. A 10% decrease in
year-end 1998 market interest rates would result in a negative impact to the
Company of $6.9 million on the fair value of its long-term obligations.
Equity Prices
The Company's subordinated convertible debentures are sensitive to
fluctuations in the price of Company common stock into which the obligations are
convertible. Changes in the price of the underlying common stock would result in
changes in the fair value of the Company's subordinated convertible debentures
due to the difference between the current market price and the market price at
the date of issuance of the debentures. A 10% increase in the year-end 1998
market equity prices would result in a negative impact to the Company of $3.1
million on the fair value of its price-sensitive equity financial instruments.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 on the Company's
internal business systems, products, and operations. The Company's year 2000
initiatives include (i) testing and upgrading significant information technology
systems and facilities; (ii) testing and developing upgrades, if necessary, for
the Company's current products and certain discontinued products; (iii)
contacting key suppliers and vendors to determine their year 2000 compliance
status; and (iv) developing a contingency plan.
33
Year 2000 (continued)
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and this process was approximately 50% complete as of January 2, 1999.
In many cases, such upgrades or replacements are being made in the ordinary
course of business, without accelerating previously scheduled upgrades or
replacements. The Company expects that all of its material information
technology systems and critical facilities will be year 2000 compliant by
September 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, will not be year 2000 compliant.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations in order to assess their year 2000 readiness.
As part of this effort, the Company has developed and is distributing
questionnaires relating to year 2000 compliance to its significant suppliers and
vendors. The Company has started to follow-up and monitor the year 2000
compliance progress of significant suppliers and vendors that indicate that they
are not year 2000 compliant or that do not respond to the Company's
questionnaires. The Company has completed the majority of its assessment of
third party risk, and expects to be substantially completed by September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 issues.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. The Company does
not track the internal costs incurred for its year 2000 compliance project. Such
costs are principally the related payroll costs for its information systems
group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or
34
Year 2000 (continued)
delays. Despite its efforts to ensure that its material current products are
year 2000 compliant, the Company may see an increase in warranty and other
claims, especially those related to Company products that incorporate, or
operate using, third-party software or hardware. In addition, certain of the
Company's older products, which it no longer manufactures or sells, may not be
year 2000 compliant, which may expose the Company to claims. If any of the
Company's significant suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected.
The Company's research and development, production, distribution, financial,
administrative, and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from year 2000 issues could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
35
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Risks Associated With Technological Change, Obsolescence, and the
Development and Acceptance of New Products. The market for the Company's
products is characterized by rapid and significant technological change and
evolving industry standards. New product introductions responsive to these
factors require significant planning, design, development, and testing at the
technological, product, and manufacturing process levels, and may render
existing products and technologies uncompetitive or obsolete. There can be no
assurance that the Company's products will not become uncompetitive or obsolete.
In addition, industry acceptance of new technologies developed by the Company
may be slow to develop due to, among other things, existing regulations written
specifically for older technologies and general unfamiliarity of users with new
technologies. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Risks Associated With Acquisition Strategy. One of the Company's growth
strategies is to supplement its internal growth with the acquisition of
businesses and technologies that complement or augment the Company's existing
product lines. Certain businesses the Company has acquired in the past have had
low levels of profitability, and businesses that the Company may seek to acquire
in the future may also be marginally profitable or unprofitable. In order for
any acquired businesses to achieve the level of profitability desired by the
Company, the Company must successfully reduce expenses and improve market
penetration. No assurance can be given that the Company will be successful in
this regard. In addition, promising acquisitions are difficult to identify and
complete for a number of reasons, including competition among prospective buyers
and the need for regulatory, including antitrust, approvals. There can be no
assurance that the Company will be able to complete pending or future
acquisitions. In order to finance any such acquisitions, it may be necessary for
the Company to raise additional funds either through public or private
financings. Any equity or debt financing, if available at all, may be on terms
which are not favorable to the Company and may result in dilution to the
Company's shareholders.
Possible Adverse Impact of Significant International Operations. Sales
outside the United States accounted for approximately 63% of the Company's
revenues in 1998, and the Company expects that international sales will continue
to account for a significant portion of the Company's revenues in the future.
Sales to customers in foreign countries are subject to a number of risks,
including the following: agreements may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system; foreign customers
may have longer payment cycles; foreign countries could impose withholding taxes
or otherwise tax the Company's foreign income, impose tariffs, or adopt other
restrictions on foreign trade; fluctuations in exchange rates may affect product
demand and adversely affect the profitability in U.S. dollars of products and
services provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; U.S. or foreign
export licenses may be difficult to obtain; and the protection of intellectual
property in foreign countries may be more difficult to enforce. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business and results of operations.
In 1998, the Company's U.S. and foreign operations had revenues from
customers in Asia of approximately $72.7 million, or 16% of total revenues,
compared with Asian revenues of $100.0 million, or 20% of total revenues, in
1997. Certain countries in Asia continue to experience a severe economic crisis,
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales to Asia have been adversely affected by the
unstable economic conditions there. The unstable economic conditions in Asia
and, to a lesser extent, decreased order activity in the semiconductor industry,
have also resulted in a decrease in backlog. At January 2, 1999, the Company's
backlog was $85.4 million, compared with $101.0 million at January 3, 1998. The
Company does not believe that its backlog is necessarily indicative of the
intermediate or long-term trends in its business. However, if the Asian
economies were to continue to worsen and order activity were to continue to
decrease, the Company could experience a further decrease in revenues, which
could adversely impact the Company's business and operating results.
36
Competition. The Company encounters and expects to continue to encounter
intense competition in the sale of its products. The Company believes that the
principal competitive factors affecting the market for its products include
product performance, reliability, customer service, and price. The Company's
competitors include large multinational corporations and their operating units,
including the AI division of The Perkin-Elmer Corporation, Varian Associates,
Inc., Bruker Instruments, Inc., Shimadzu Corporation, and Hewlett-Packard Co.
These companies and certain of the Company's other competitors have
substantially greater financial, marketing, and other resources than those of
the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than the Company. In
addition, competition could increase if new companies enter the market or if
existing competitors expand their product lines or intensify efforts within
existing product lines. There can be no assurance that the Company's current
products, products under development, or ability to discover new technologies
will be sufficient to enable it to compete effectively with its competitors.
Risks Associated With Protection, Defense, and Use of Intellectual
Property. The Company holds patents relating to various aspects of its products,
and believes that proprietary technical know-how is critical to many of its
products. Proprietary rights relating to the Company's products are protected
from unauthorized use by third parties only to the extent that they are covered
by valid and enforceable patents or are maintained in confidence as trade
secrets. There can be no assurance that patents will issue from any pending or
future patent applications owned by or licensed to the Company or that the
claims allowed under any issued patents will be sufficiently broad to protect
the Company's technology. In the absence of patent protection, the Company may
be vulnerable to competitors who attempt to copy the Company's products or gain
access to its trade secrets and know-how. Proceedings initiated by the Company
to protect its proprietary rights could result in substantial costs to the
Company. There can be no assurance that competitors of the Company will not
initiate litigation to challenge the validity of the Company's patents, or that
they will not use their resources to design comparable products that do not
infringe the Company's patents. There may also be pending or issued patents held
by parties not affiliated with the Company that relate to the Company's products
or technologies. The Company may need to acquire licenses to, or contest the
validity of, any such patents. There can be no assurance that any license
required under any such patent would be made available on acceptable terms or
that the Company would prevail in any such contest. The Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which the Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business,
results of operations, and financial position could be materially adversely
affected. In addition, the Company relies on trade secrets and proprietary
know-how which it seeks to protect, in part, by confidentiality agreements with
its collaborators, employees, and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors.
Dependence on Semiconductor Industry; Industry Volatility. A portion of
the Company's total revenues is attributable to the sale of products and related
services to customers in the semiconductor industry. The semiconductor industry
has historically been cyclical and is characterized by sudden and sharp changes
in supply and demand. Demand for the Company's products and services within the
semiconductor industry is dependent upon, among other factors, the level of
capital spending by semiconductor companies. The semiconductor industry is
currently experiencing a downturn in demand for its products as a result of the
current economic crisis in Asia, excess manufacturing capacity, and slowdowns in
sales of high-end personal computers. Many semiconductor manufacturers have
delayed construction or expansion of their production facilities in response to
the foregoing conditions. These conditions have materially adversely affected
the Company's business and results of operations. Further decreases in
semiconductor activities could continue to adversely affect the demand for the
Company's products and related services, which could continue to materially
adversely affect the Company's business, results of operations, and financial
condition.
37
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers or vendors experience business disruptions due to year
2000 issues, the Company might also be materially adversely affected. The
Company's research and development, production, distribution, financial,
administrative, and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from year 2000 issues could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
38
Selected Financial Information
(In thousands except per share amounts) 1998 (a) 1997 (b) 1996 (c) 1995 (d) 1994
- -------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $447,301 $ 512,464 $446,583 $212,152 $165,398
Income Before Extraordinary Item 33,583 41,310 27,263 16,009 14,423
Net Income 33,863 41,310 27,263 16,009 14,423
Earnings per Share:
Basic .66 .82 .56 .36 .32
Diluted .63 .77 .55 .36 .32
Balance Sheet Data
Working Capital $ 97,791 $ 67,592 $ 40,150 $144,541 $ 33,429
Total Assets 561,668 580,536 616,316 432,882 230,606
Long-term Obligations 71,761 81,400 96,778 101,079 1,037
Shareholders' Investment 327,051 288,293 266,139 220,988 156,175
(a) Includes restructuring and related costs of $10.1 million and an
extraordinary gain of $0.3 million, net of taxes, related to the Company's
repurchase of $6.7 million principal amount of 5% subordinated convertible
debentures.
(b) Includes the acquisition of Spectronic, effective March 1997 and the
distribution of Thermo Vision in December 1997.
(c) Includes the acquisitions of Haake, VG Systems, VG Elemental, and ARL,
effective March 1996 and the net proceeds from the Company's initial public
offering in June and July 1996.
(d) Includes the January 1995 acquisition of the Analytical Instruments Division
of Baird Corporation and the acquisitions of Mattson Instruments and Unicam
divisions of Analytical Technology, Inc., effective December 1995. Also
reflects the issuance in October 1995 of $96.3 million principal amount of
5% subordinated convertible debentures due 2000.
39
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TOC. The following table sets forth the high and low sale prices for
1998 and 1997, as reported in the consolidated transaction reporting system.
1998 1997
------------------ -------------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $17 5/8 $12 1/2 $14 3/4 $10 7/8
Second 18 5/16 13 3/4 13 7/8 10 3/4
Third 14 7/8 7 3/16 19 5/8 11 1/8
Fourth 11 3/8 7 5/8 19 13 1/4
As of January 29, 1999, the Company had 66 holders of record of its common
stock. This does not include holdings in street or nominee names. The closing
market price on the American Stock Exchange for the Company's common stock on
January 29, 1999, was $10 1/8 per share.
Shareholder Services
Shareholders of Thermo Optek Corporation who desire information about the
Company are invited to contact the Investor Relations Department, Thermo Optek
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose stock
is held in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible. Distribution
of printed quarterly reports is limited to the second quarter only. All material
is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/toc1.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermo Optek
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 11 a.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
40